More
deregulation and structural reforms should help Japan stimulate domestic demand and
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Japan's efforts to deregulate its economy should be
intensified if Japan is to further stimulate domestic demand and provide better market
access opportunities for its trading partners. A new WTO report on Japan's trade policies
and practices notes Japan's intent to strengthen market mechanisms through structural
reform and deregulation, and to reorient its economy towards a greater reliance on
domestic, rather than export demand. The report notes, however, that several sectors,
including agriculture, construction and certain services remain subject to restrictive
regulations that affect both foreign market access and the better allocation of domestic
resources.

The report observes that Japan's economy has not
improved since the last WTO trade policy review in April 1995. Various packages of fiscal
and monetary stimulus during 1995 sustained moderate economic growth, but led to a
worsening of public finances. Since the second quarter of 1997, there has been a downturn
in the domestic economy, with export demand the only significant source of growth. The
report also notes that the financial crisis in East Asian economies is likely to affect
Japan more severely than other industrialized countries. This is mainly due to Japan's
strong trade and investment ties in the region.

The WTO Secretariat report and a policy statement
prepared by the government of Japan, will provide the basis for a review of Japan's trade
policies and practices on 27 and 28 January 1998.

Deregulation and structural reform are the main
themes of Japan's current trade and investment-related measures, and the extent to which
significant progress can be made will affect its ability to achieve its economic and
social objectives. An improvement in customs clearance times and sanitary inspection
procedures, for example, are important elements of the reform measures. On standards and
mandatory regulations, comprising both technical and sanitary-related measures, Japan
seeks to coordinate domestic measures with international norms.

The report notes that Japan's import and investment
promotion programmes maintain substantial government incentives; it is not evident,
however, that these programmes fully address the obstacles encountered. The schemes also
largely exclude important sectors of interest to trading partners, especially in
agriculture and services, which have not generally been exposed to international trade and
are subject to extensive government regulation.

Since the last trade policy review in April 1995,
there have been no major changes in Japan's tariff structure. The simple average rate was
9.4 per cent in 1997, with some 60 per cent of tariff lines rated at 5 per cent or
below. High tariff peaks occur in agriculture, food manufacturing, textiles and footwear,
and substantial tariff escalation occurs in a number of sectors, mainly between
semi-processed and fully-processed items, particularly in food manufacturing and petroleum
refining. Various tariff cuts, including the elimination of applied tariffs, were made
either autonomously or under existing agreements, including on certain chemical products,
textiles and non-ferrous metals. In regard to information technology products, Japan has
pledged to reduce bound tariffs to zero for 57 percent of its tariff lines in this sector.
However, tariffs for fishery products, certain wood products and petroleum remain unbound
and state trading regulations are in place for such items as rice, barley, wheat, milk
products, raw silk, salt and leaf tobacco.

Japan does not belong to any customs unions or
free-trade areas, although it is a leading member of the Asia Pacific Economic Cooperation
forum (APEC) and the Asia-Europe Meeting (ASEM). It has a number of bilateral agreements
or arrangements, mainly with the United States, covering, inter alia, the automobile
sector, semiconductors, financial services and insurance. As part of its consultations
with the US in 1995, Japan undertook to increase access and sales opportunities on a
most-favoured-nation basis, for competitive foreign autos and auto parts. Japan and the
United States also agreed to establish the Global Government Forum to discuss issues
facing the world semiconductor industry, and invited participation of the European Union
and Korea. The report also notes that the only remaining "voluntary" export
restraint maintained by Japan is the monitoring arrangement on car exports to the European
Union. This arrangement is to be eliminated in 1999.

In line with WTO agreements, Japan has changed its
government procurement policy and intellectual property legislation. Since 1995 the share
of selective and single tendering in government procurement has fallen in favour of open
tendering. In order to combat violations of industrial property rights at the border,
Japan's Copyright Law was amended and fines for infringement were tripled in 1996.

Since 1995, Japan has abolished nine of 11 export
cartels. Remaining cartels, related either to the protection of quality or intellectual
property, or to import monopolies in partner countries, are to be abolished by the end of
1999. Japan has modified its competition law under the Anti-Monopoly Act, though concerns
remain about the effects on foreign access to Japan of horizontally and vertically
integrated groups. Holding companies, which had been banned previously, are now permitted
to a certain degree. Liberalization of Japan's Large Scale Retail Store Law has resulted
in a sharp increase in the number of applications to open large stores.

Concerning agriculture, the report states that
Japan's productivity remains low. The self-sufficiency ratio fell to 42 per cent in
financial year 1995, and agriculture accounted for some 20 per cent of Japan's merchandise
imports in 1996. The report notes that the overall level of support to agriculture is
still well above the OECD average and that agriculture has to date largely been excluded
from Japan's deregulation efforts. While rice imports are not currently subject to
tariffication, this special treatment agreed in the Uruguay Round will be reviewed in the
year 2000.

Services generated some 64 per cent of Japan's GDP
and some 68 per cent of employment in 1996. However, the report notes that Japan's
services sector has a lower productivity than its manufacturing sector. Manufacturing
generates about 24 per cent of Japan's GDP, a high share compared to that of other
developed economies. Regarding the services sectors, the report notes that concerns have
been raised on the links that exist between complex regulations and low productivity.

The report notes that Japan is gradually reducing
its traditional reliance on government intervention and control in the services sector.
New amendments in 1996 led to reforms in financial services; in the WTO financial services
negotiations which successfully concluded in December 1997, Japan submitted a revised
offer of commitments, including binding of all the major elements of the bilateral
measures previously agreed with the United States on insurance, banking and other
financial services. These, along with further liberalization initiatives in
telecommunications, and other deregulation measures will open services to greater
competition. However, unilateral reform measures taken by Japan in air and maritime
transport have been mainly confined to domestic services. Protective policies remain in
some professional services.

Notes to Editors

The WTO's Secretariat's report, together with a
report prepared by Japan will be discussed by the WTO Trade Policy Review Body (TPRB) on
27 and 28 January 1997. The WTO's TPRB conducts a collective evaluation of the full range
of trade policies and practices of each WTO member at regular periodic intervals and
monitors significant trends and developments which may have an impact on the global
trading system. The two reports, together with a report of the TPRB's discussion and of
the Chairman's summing up, will be published in due course as the complete Trade Policy
Review of Japan and will be available from the WTO Secretariat, Centre William Rappard,
154 rue de Lausanne, 1211 Geneva 21.

The reports cover the development of all aspects of
Japan's trade policies, including domestic laws and regulations, the institutional
framework, trade policies by measure and by sector. Since the WTO came into force, the
"new areas" of services trade and trade-related aspects of intellectual property
rights are also covered. Attached are the summary observations from the Secretariat and
government reports. Full reports will be available for journalists from the WTO
Secretariat on request.

Since Japan's last Trade Policy Review in April
1995, its economic situation has not improved. Various packages of fiscal and monetary
stimulus during 1995 sustained moderate economic growth, but led to a worsening in public
finances; the overall fiscal deficit of central and local government rose to over 5 per
cent and gross government debt to over 100 per cent of GDP. A policy reversal towards
fiscal consolidation from mid-1996 onwards, culminating in an increase in the consumption
tax in April 1997, seriously dampened domestic demand and from the second quarter of
1997, there has been a downturn in the domestic economy, with export demand the only
source of growth.

During the same period, Japan's financial sector has
been severely affected both by internal structural problems, with the collapse of a major
bank, a major securities company and emergency mergers of some banking firms, and by the
economic crisis since mid-1997 in other Asian economies, particularly Thailand and Korea
which are substantial recipients of Japanese investment.

In November 1997, the Government announced a new
series of proposed measures aimed at reducing regulatory barriers to business and
stabilizing financial markets; these measures are aimed at providing a framework for
domestic-led recovery without significant negative fiscal implications. The package
included proposals for deregulation in the telecommunications, trucking, domestic
airlines, job placement and petrol station sectors; proposals for a number of changes in
regulations on land use and disposal, including removal of limits on prices of land
transactions, modification of land use regulations in urban areas, revision of terms for
housing leases, conversion of agricultural land into other uses, including residential,
and finance for construction of suburban "weekend houses"; and proposals for
stabilization of financial markets, improved protection of investors and depositors, and
deregulation of the securities market. The Government also announced that there would be a
review of Japan's tax system relating to corporate, financial and land taxes "from
the viewpoints of creating an internationally attractive business environment, effective
land use and further stimulating private initiatives". Further measures announced in
mid-December included a ¥10 trillion package in support of the banking sector and a
new income tax reduction amounting to ¥2 trillion for FY 1997.

Some of the measures proposed are directly
"pump-priming" in nature; the Government has estimated that the direct effect of
the November economic package is expected to be some 6 trillion yen per year
(about 1 per cent of GDP). Others, such as the tax policy review, are geared to
the longer term.

The financial and structural crisis in other East
Asian economies, expected to reduce growth in the region considerably, is likely to affect
Japan more severely than other major industrialized countries, because the structure of
Japan's trade and investment has become increasingly concentrated in East Asia. A
substantial volume of manufacturing output by Japanese-owned firms, destined both for
export and domestic markets, has been delocalized to other parts of East Asia, in search
of lower costs and dynamic markets; East Asia's share of Japan's exports and imports has
thus continued to grow, reaching 43 and 36 per cent respectively in 1996 (compared to 30
and 28 per cent in 1990).

Institutional and Legal Framework

WTO Participation

Japan is an original signatory to all the WTO
Multilateral Trade Agreements and to the Agreement on Government Procurement. Japan
applies MFN treatment to all but six countries and customs territories: Albania,
Equatorial Guinea, Lebanon, Nepal, the Democratic People's Republic of Korea and Viet Nam.

Consistency of domestic and external policies is
sought both at the Cabinet level and through a number of organizations under the Prime
Minister or Cabinet. Japan is party to the Negotiations on Basic Telecommunications, the
Declaration on Trade in Information Technology Products (the "Information Technology
Agreement") and the recently completed Financial Services negotiations. Japan also
participates in the WTO Working Groups on Trade and Investment and Trade and Competition
Policy.

Japan has been actively involved in the WTO dispute
settlement provisions, both as complainant and respondent. To date, Japan has requested
consultations on four and received complaints on eight cases, and has been involved as a
third party in six cases. The rulings of a Panel on alcoholic beverage taxation have been
confirmed by the Appellate Body, and the authorities have indicated their intention to
implement its recommendation. Consultations between the parties are continuing on other
cases.

Bilateral and Regional Agreements

Japan has a number of bilateral agreements,
arrangements or understandings, mainly with the United States, on increasing market access
or reducing trade barriers; these cover, inter alia, automobiles and automobile parts,
semiconductors, financial services and insurance. Japan does not belong to any customs
unions or free-trade areas; on the other hand, it is a leading member of the Asia Pacific
Economic Cooperation (APEC) and the Asia-Europe Meeting (ASEM).

Trade Policy Features and Trends

Recent Evolution

Recent economic policy has aimed at further
strengthening market mechanisms through structural reform and deregulation, and the
reorientation of the economy towards greater reliance on domestic, rather than export
demand. The Deregulation Action Program, first announced in March 1995 and revised
annually since, has sought to clarify and reduce the scope of government regulations,
especially in financial services, telecommunications and domestic transport. Agriculture,
construction and international transport have, however, largely been exempted from these
moves to deregulation. Concerns have, in this light, been expressed regarding the process
of structural reform.

Japan added 14 former Soviet Union states to the
coverage of its GSP scheme in 1995-1996. Japan has never "graduated" any
developing country from the coverage of its GSP scheme; however, the Trust Territory of
the Pacific Islands was removed from the scheme in 1997 when the trust ended.

Type and Incidence of Trade Policy Instruments

Tariffs

There have been no major changes in Japan's tariff
structure since its last Review. The simple average rate was 9.4 per cent in 1997;
some 60 per cent of tariff lines are rated at 5 per cent or below. Tariff peaks occur in
agriculture, food manufacturing, textiles and footwear, rising to some 920 per cent
(the ad valorem equivalent of a specific rate) on some vegetable products (konnyaku
tubers). Substantial tariff escalation occurs in a number of sectors, mainly between
semi-processed and fully-processed items, particularly in food manufacturing and petroleum
refining.

The simple average tariff on industrial products
(defined as Harmonized System (HS) Chapters 25 to 97) was 4.9 per cent
in 1997. Various tariff cuts, including the elimination of applied tariffs, were made
either autonomously or under existing agreements, including on certain chemical products,
textiles and non ferrous metals; in FY 1996, WTO-related reductions in bound tariffs were
implemented ahead of schedule for 697 mining and manufacturing items under Japan's APEC
commitments. The tariff quota system on fattening cattle for beef, oats, hi-test molasses,
rum and tafia was abolished. Under the Declaration on Trade in Information Technology
Products, Japan has pledged to reduce bound tariffs to zero for 57 per cent of lines
included: virtually all such lines already benefit from duty free treatment de facto.

Import Procedures

Port and customs procedures for imports have been
accelerated, leading to a reduction in clearance times, which nevertheless remain lengthy
by developed-country standards. The authorities state that they are working towards
further acceleration of such procedures through an extension of computerization. Four new
Foreign Access Zones (FAZ), centralized locations for import-related operations and
facilities to streamline the distribution of imported cargo, has been approved.

Import Limitations

A total of about 120 tariff lines at the HS
nine-digit level, including fishery products, certain wood products and petroleum, remain
unbound and import quotas apply to some items. State trading remains in rice, wheat and
barley, milk products, raw silk, salt, leaf tobacco, industrial alcohol and opium. The
import cartel covering imports of silk from China was abolished and replaced by an import
quota system in 1996; annual consultations are held with China regarding imports of silk
yarn and fabrics. Surveillance is also in force on some other products, including VERs by
China on garlic and ginger. Japan has notified to the Textiles Monitoring Body a phase-out
programme for its prior confirmation and customs confirmation system on silk product
imports from the Republic of Korea.

Technical Barriers

Japan seeks increasingly to coordinate domestic
technical and sanitary regulations and standards with international norms. The number of
Japanese industrial standards (JIS) corresponding to such norms has grown since 1995,
with a target of 1,000 standards to be aligned in three years, and the scope of
permission for foreign testing, certification, and factory approval has also increased
somewhat. Mandatory technical regulations (in some cases implementing otherwise voluntary
standards) are in force notably on food, pharmaceuticals, fertilizers, electrical goods,
and products covered under safety regulations for road vehicles, though little information
on the total number of such regulations is available.

Government Procurement

In 1996, Japan introduced operational guidelines to
apply the 1994 Action Plan for greater fairness and transparency in government
procurement. In that year, the share of overseas products in procurement valued above
SDR 100,000 was some 18 per cent. Since 1995, the share of selective and single
tendering has fallen in favour of open tendering.

Contingency Measures

Anti-dumping investigations were initiated and
definitive duties were imposed on cotton yarn from Pakistan in 1995. Following reviews in
1996 and 1997, these duties were reduced or eliminated. Japan has never used
countervailing actions or GATT safeguard measures.

Import and Investment Promotion Measures

Japan's import and investment promotion programmes
include substantial government incentives, yet it is not evident that these programmes
fully address the obstacles encountered; to date, most measures have focused on assisting
with existing procedures, rather than attempting major structural improvements. Import
promotion measures, including tax incentives and financial measures, have been extended at
least until March 1998. Promotional measures for inward direct investment, mainly
comprising tax incentives, financial support and technical assistance, were also expanded.

Export Restrictions

Under WTO provisions, Japan is reducing the number
and scope of restrictions on exports. The only remaining "voluntary" export
restraint is the monitoring arrangement on car exports to the European Union, which is to
be eliminated in 1999. Nine of 11 export cartels have been abolished since 1995. Remaining
export cartels, related either to protection of quality or intellectual property, or to
import monopolies in partner countries are to be abolished by end-1999.

Measures Relating to the Domestic Market

Changes have taken place in Japan's competition law
under the Anti-Monopoly Act (AMA). AMA exemptions allowing retail price maintenance on
designated cosmetics and over-the-counter medicines were revoked in 1997. The number
of permitted ("exempted") cartels has declined steadily. Easing of obstacles to
mergers and acquisitions are regarded as official priorities. Concern remains about the
effects on foreign access to Japan of horizontally and vertically integrated groups
(kigyo-shudan and keiretsu).

Intellectual Property

Japan is a founding member of the World Intellectual
Property Organization (WIPO), and a signatory to most major treaties regarding
intellectual property rights. Recent legislative amendments include a reduction in the
time required by the patent office to treat patents cases and the introduction of a
post-grant opposition system; thus, the average approval time for patent and utility model
applications was reduced to under 24 months by end-1995. To combat violations of
industrial property rights at the border, the Copyright Law was amended and fines for
infringement were tripled in 1996.

Sectoral Policies

Agriculture

Japan's agricultural productivity remains low,
reflecting the rapid aging of the agricultural population and the extremely small average
size of farms. The agricultural self-sufficiency ratio fell to 42 per cent in
FY 1995, and agriculture accounted for some 20 per cent of Japan's merchandise
imports in 1996. High tariff peaks and tariff escalation, together with substantial
end-use tariff concessions for domestic processing, are prevalent and the overall level of
support to agriculture remains well above the OECD average. The high cost of agricultural
inputs has been an important factor in encouraging Japan's food processing industries to
relocate offshore.

Japan's implementation of tariffication requirements
under the WTO resulted in a significant increase in the number of specific rates.
Tariffication of quantitative restrictions often implies, as in other WTO members,
prohibitive duty levels. Tariff quotas have frequently been underutilized and there is no
system for reallocation of unused quotas. Japan has triggered Special Safeguards under the
WTO Agreement for a number of products subject to tariffication. Rice imports are not
currently subject to tariffication; the question of continuation of special treatment
agreed in the Uruguay Round is to be negotiated in the year 2000.

Though some progress in distribution has been
made, such as the abolition in 1995 of the requirement that all rice producers should
sell their output to the Government, agriculture has to date largely
been excluded from Japan's deregulation efforts. Over-production of rice remains a
chronic problem and set-aside provisions for rice land have continued to be the
Government's primary response to the issue.

Energy and Utilities

More than 90 per cent of Japan's primary fuels are
imported; thus, stable supply has been the major objective of Japan's energy policy and
regulations have tended to discourage efficiency. As a result, the price of energy has
generally been higher than in other developed countries. However, there are signs of a
change in policy direction; recent steps to deregulation have incorporated certain
competition-enhancing measures, including the liberalization of petroleum product imports
in March 1996 and the introduction of competition in wholesale sales of electric
power to the utility companies. Some relaxation in regional monopoly arrangements for city
gas companies has also been introduced.

Manufacturing

Manufacturing generates about 24 per cent
of Japan's GDP, a high share compared to that of other developed economies. In 1996,
exports of manufactures were some 7 per cent lower than in 1995. Japan's outward
foreign direct investment in manufacturing has also continued to increase. Tariffs on most
manufactures are generally low by comparison to both historical and international levels;
however, exceptions include textiles and clothing and leather and leather products.

Primarily as a result of the 1995 Japan-U.S. Autos
and Auto Parts Consultations, Japan undertook, inter alia, to increase access and sales
opportunities, on an MFN basis, for competitive foreign autos and auto parts. A certain
number of "critical parts" have been deregulated in this connection. As noted
above, voluntary export restrictions remain on Japan's car exports to the European Union.

A new consultative framework on semiconductors
between the United States has been established, both at government-to-government level and
in the private sector. After the expiry of the 1991 Japan-U.S. Semiconductor Arrangement,
the two Governments agreed to establish the Global Government Forum at the government
level and the World Semiconductor Council at the private-sector level; Governments and
producers from the European Union and the Republic of Korea are also involved in these
arrangements.

Recent changes in Japan's policy towards
pharmaceuticals and cosmetics include the reclassification of certain vitamins, herbs and
minerals as food products (easing access to these products), some organizational changes
in the review system for new drug application, and relaxation of regulations on parallel
imports of cosmetics. Japan participates in the International Conference on Harmonization
of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) to
harmonize quality, safety and efficacy requirements of pharmaceuticals.

The iron and steel industry has been designated as
one of the sectors that may apply for government assistance, such as low interest loans,
loan guarantees and tax breaks, in the framework of the Law on Temporary Measures to
Facilitate Business Innovation. The Government guarantees national treatment in the
application of the law.

Services

Private services generated some
64 per cent of Japan's GDP and some 68 per cent of employment in 1996.
It has often been pointed out that Japan's services sector has lower productivity than
manufacturing; with services accounting for about two-thirds of GDP, it is clear that
productivity growth in services is a determining factor in Japan's living standards. This
is particularly the case for "input" services such as financial services,
telecommunications and transport, where productivity gains can significantly cut costs in
other sectors.

Concerns have been raised on the close links between
complex regulations and low productivity in service sectors. Legislation in certain areas
of the financial, telecommunications, air and maritime transport services sectors allows a
high degree of discretion to the authorities. Recent initiatives show a sign of change in
the direction of policy; along with general deregulation, Japan is gradually reducing its
traditional reliance on government intervention and control, for example in moving toward
eliminating the "demand-supply adjustment" provisions that limit competition in
many areas.

Recent developments in financial services and
telecommunications, if fully carried through, may enhance the prospects for productivity
growth in these sectors. New amendments to the Foreign Exchange and Foreign Trade Control
Law, announced in 1996 as part of structural reform measures (the Japanese version of the
"Big Bang") on financial services, further liberalization initiatives in
telecommunications, and other deregulation measures listed in the Deregulation Action
Program will open these services to greater competition. Bilateral agreements with the
United States on insurance banking, and other financial services are to be applied on an
MFN basis to all WTO members; all the major elements of these agreements, together with
other concessions relating to insurance and foreign exchange trading, will be bound by
Japan in the WTO financial services negotiations. However, unilateral reform measures
taken by Japan in the air and maritime transport sectors have been mainly confined to
domestic services; protective policies also remain in some professional services.

Trade Policies and Foreign Trading Partners

Since the last Trade Policy Review, Japan has been
active in implementation of the Uruguay Round Results. Trade liberalization initiatives
taken in the Asia Pacific Economic Cooperation forum (APEC), are also to be implemented on
an MFN basis. However, the increased concentration of trade and investment in the Asian
region has made Japan more directly vulnerable to the financial and economic crisis in the
region than are other major industrialized economies.

Some steps have been taken towards greater
deregulation and structural reform in Japan's economy; however, these are still partial in
scope and several sectors, including agriculture, construction and certain services,
especially financial, remain subject to restrictive regulations that affect both foreign
market access and better allocation of domestic resources. Firm continuation of the
deregulation process would therefore be an essential element in stimulating the domestic
market, as the authorities seek, and encouraging improved market access.

Japan in the Multilateral SystemProgress of Globalization and Japan's Policy Efforts

The Government of Japan has, intensified its policy
efforts geared toward the 21st century by adopting measures for enhancing further
harmonization between the Japanese and the international economy, and responding actively
to the globalization trend.

The Government of Japan has implemented extensive
reforms in the domestic market in order to realize an economic structure poised to take
full advantage of market forces. To this end, the Government has endeavoured to implement
a reform policy through deregulation and improved market-access measures, which increase
the efficiency and resilience of the Japanese economy, and enhances Japan's international
attractiveness as an arena for economic activities. In the area of deregulation, for
example, Japan formulated in 1995 a Deregulation Action Program comprising 1,091 items in
11 areas, and has continued to improve and revise this plan in 1996 by adding 569 new
items. Likewise, efforts have been made to increase even more the level of freedom,
fairness and globalization in the Japanese financial system, and, thus, make the Japanese
market comparable to those of New York and London. This reform, for example, would promote
access to and use of the Yen across national borders, by allowing smoother fund raising in
Japan as well as freer use of the Yen abroad.

Consolidation of the Multilateral System

For more than forty years since its accession in
1955, the Government of Japan has been committed to maintaining and strengthening a free
and non-discriminatory multilateral trading system under the framework of GATT/WTO.

Japan has participated actively in the multilateral
trade negotiations, including the Kennedy Round, the Tokyo Round, and the Uruguay Round,
and Japan has benefited to a great extent from liberalization of world trade within the
rule-based system. Japan on its part has contributed to the sustained growth of the world
economy through its progressive liberalization and elimination of tariff and non-tariff
barriers to trade.

Japan has been actively engaged in promoting further
trade and investment liberalization in the WTO as one of its major members, for example,
by taking the lead in forming a consensus at the SMC on the so-called new issues such as
trade and competition policy, trade and investment, and on the ITA.

Particularly with regard to investment, Japan
actively seeks to contribute toward a successful accord on OECD's proposed Multilateral
Agreement on Investment (MAI), as well as working to examine the relationship between
trade and investment through discussions with developing countries at the WTO.

Japan also believes that it is important to
encourage the developing and least-developed countries as well as the economies in
transition to achieve early accession to the WTO, since such a step will facilitate the
integration of those economies into the multilateral trading system, thereby ensuring
universality of the WTO system. Japan is determined to continue to play a leading role in
supporting the accession process of applying countries and economies.

Furthermore, Japan attaches great importance to the
multilateral trading system, the primacy of which has been reaffirmed in the Singapore
Ministerial Declaration. It is, therefore, indispensable to shape regional trade
agreements in a manner that they are complementary to it, and consistent with its rules.

The mission of WTO has been in the past and will be
in the future to achieve through negotiations the continuing liberalization of trade
within a rule-based system. The Government of Japan, fully recognizing its
responsibilities, is prepared to address the various challenges, which it may encounter in
the endeavour toward further liberalization.

The Trade and Economic Policy Environment

Japan's Economic Environment

Four years have passed since the trough of economic
depression in October 1993, and the upswing in economy is one of the longest in the
postwar period. The tempo of the recovery is, however, slow. The Japanese economy recorded
especially up to the middle of 1995 very small growth rates (nearly zero), and small but
frequent adjustments in inventories and production. Various economic measures were thus
employed to bolster economic growth, including significant public investment spending, and
tax reductions.

However, a strengthened cyclical upswing was seen in
FY1996. Adjustments of inventories, production and employment were accelerated. Since
mid-95, the exchange rate trend has shifted to the correction of the yen overvaluation
which have contributed to positive external demand contribution, contributing thus to
economic growth, and the level of job uncertainty has been reduced due to the improved
employment situation. In spite of the increase in consumption tax as of April 1997, the
basic trend of economic recovery with the demand in private sectors as the primary
favourable factor continues, even though the pace of recovery at the moment has become
gradual, and circumspect attitudes of enterprises are observed in respect to their
judgement on business conditions.

Financial conditions have been those of easy money
already since September 1995, when the official discount rate was reduced to a 0.5 percent
level. Long-term interest rates have been below 3 percent point since the middle of 1996,
while short-term lending rates have remained about the same. Money supply at M2+CD level
has increased at an annual rate of about 3 percent. The easy monetary policy has
contributed to the economic upswing by stimulating housing construction and investment
into plant and machinery.

Stock prices seem to follow separate trends. Those
of highly profitable industries have been steady. Those of the financial and construction
sectors, on the other hand, have decreased.

With respect to exchange rate movements, the trend
in the Yen's depreciation has continued. It is often argued that this exchange rate
movement is caused by increasing investment into dollar dominated securities due to the
widening interest rate differential between the United States and Japan, and decreasing of
the current account surplus.

Trend in Foreign Trade

Trade statistics indicate that Japan's trade surplus
expanded for two straight years from 1991 onwards, due, inter alia, to a stagnant domestic
economy. A trade surplus value of ¥13.48 trillion was recorded in 1992, the second
highest in the period after 1986. There has been, however, an overall and increasingly
steady trend toward a contracting trade surplus down to ¥6.74 trillion in 1996, even
though ¥3.98 trillion showing a year-to-year increase of 28.3 percent was recorded in the
first half of 1997.

Although the total value of exports decreased by 6.5
percent in 1993, it increased for three straight years from 1994 onwards.

- The total value of exports (1996) ¥44.73 trillion
(an increase of 7.7 per cent as against 1995)

- A year-to-year increase (the first half of 1997)
up by 15.1 per cent (as against the first half of 1996)

- Increase of the total value of exports in 1996 on
a regional basis (as against 1995)

The Middle East
&n bsp; up by 24.9 percent

China up by 15.5 percent

The Association of Southeast Asian Nations (ASEAN)
up by 9.3 percent

The United States
& nbsp; up by 7.4 percent

The European Union (EU)
&n bsp; up by 3.7 percent

- The total value of imports likewise increased for
three straight years from 1994 onwards.

- The total value of imports (1996) ¥37.99 trillion
(an increase of 20.4 percent as against 1995)

- A year-to-year increase (the first half of 1997)
up by 12.9 percent

- Increase of the total value imports in 1996 on a
regional basis (as against 1995)

China & nbsp; up by 30.1
percent

The Middle East up by 28.8 percent

ASEAN up by 25.7 percent

The United States up by 22.0 percent

The share of manufactured goods in total imports has
also been increasing steadily, reaching in 1996 a record level of 59.4 percent (a 28.5
percent point increase as against 1985).

Japan's Investment Trend

Japan's outward foreign direct investment (FDI) on
an MOF reported base amounted to ¥5,409.4 billion in FY 1996, which represents an
increase of 9.1 percent as against FY 1995. Such increasing trend has continued for the
third consecutive year. In FY 1995 a 15.8% increase was recorded as against FY 1994.

The major characteristics of outward FDI in FY 1996
were :

(i) A sharp increase of FDI in the transport sector,
which was caused by active overseas business operations by automobile companies, raised
investment levels in the manufacturing industry to its historically highest level.

(ii) The growth rate of the flow of FDI into Asia,
however, slowed down with a recorded annual growth rate of 9.7 percent (¥ 1308.3
billion), as the growth rate was 18.2 percent in FY 1995. This slow down was largely due
to a sharp decline in investment in China, which had experienced a rapid increase until
the previous FY. Over 70 percent of such investment into China was made into the
manufacturing industry. Overall investment into the Asian manufacturing industry recorded
therefore a 4.5 percent decline as against the preceding FY, and fell below investment
levels into North America. Overall investment levels into North America increased by 15.8
percent (¥2593.3 billion) as against the preceding FY. Investment into the manufacturing
industry continued its growth pattern by an annual increase of 36.4 percent.

FDI flows into Japan reached ¥770.7 billion,
equivalent to a 108.5 percent increase as against FY 1995, which was caused by doubling of
investment amounts into both manufacturing and non-manufacturing industries. Thus, the
previous FY's decrease reversed into an increase in FY 1996. Hence, the gap between
outward and inward FDI flows was reduced considerably, that is from a 1:13 ratio in FY
1995 to a 1:7 ratio in FY 1996.

Major characteristics of inward FDI flows in FY 1996
were :

(i) In the manufacturing industry, a large increase
in inward FDI was recorded for the machinery and metal sub-sectors. In the
non-manufacturing industry, investment into the service sector increased with investment
originating from Singapore, and investment into the commerce, trade and real estate
sectors likewise recorded a significant increase.

(ii) Investment flows originating from North
America, which has accounted for the largest share, increased even more (36.9 percent
(¥244.5 billion) as against the preceding FY). The share of investment flows originating
from Asia increased from 6.7 percent (¥24.7 billion) in FY 1995 to 17.8%(¥137.2
billion). As regards Europe, inward investment flows originating from major countries,
such as the Netherlands, Germany, and the UK increased. However, their combined share
decreased from 34.5 percent (¥127.4 billion) in FY 1995 to 28.6 percent (¥220.2
billion). Europe's decreased share was due to the significant growth in the share of
inward FDI originating from Asia and Latin American countries. A large increase in
investment amounts from foreign affiliates in Japan has been recorded (¥23.3 billion in
FY1985 to ¥100.0 billion in FY 1996).

Trade Policy Development 1995-1997

The Uruguay Round and WTO Implementation

The Government of Japan has faithfully implemented
the results of the Uruguay Round negotiations. The following are some of the examples
which demonstrate policy efforts of the Government in this regard.

Average tariff rates were, as a result of the
Uruguay Round negotiations, reduced to 1.5 percent for industrial products, 1.0 percent
for forestry products, 4.1 percent for fisheries' products, and 9.3 percent for
agricultural products. The average tariff rate for non-agricultural products was thus
reduced to an overall 1.7 percent level, one of the lowest in the world.

Japan contributed to the successful conclusion of
the Information Technology Agreement (ITA) at the WTO Singapore Ministerial Conference in
1996. Japan has already implemented in July 1997 the first tariff reductions, and Japan
will eliminate customs tariffs on such information technology products by the year 2000.
Regarding the Tariff Elimination Initiative on pharmaceuticals, Japan expanded the number
of tariff lines to cover about 400 products, in July 1997 based on the review results.

The rules covering special duties (anti-dumping
duty, and so on) were revised in conformity with the Uruguay Round agreements.

Japan has taken the following measures regarding
market access in the agricultural field :

a) Since April 1,1995, Japan has implemented tariff
reductions in line with its schedule

b) In accordance with access commitments as
specified in its schedule, Japan has introduced tariff quota and established current
access opportunities, which are subject to tariffication, and

c) Japan has established minimum access
opportunities for rice in accordance with Annex 5 of the Agreement on Agriculture.

The following amended domestic laws were passed in
order to implement the above measures: the revised Customs Tariff Law; the Temporary
Tariff Measures Law; the Manufacturing Milk Producer Compensation Temporary Law, and the
Cocoon and Raw Silk Price Stabilization Law. In addition, the Law for Stabilization of
Supply-Demand and Price of Staple Food was introduced. Japan's total AMS in the field of
domestic support in FY 1995 was below the level committed in its schedule for FY 1995,
mainly due to reductions of administered prices and so on.

Since January 1, 1995, tariff reductions have been
implemented in accordance with the schedule in the areas of forestry and fishery products.

In the area of trade in services, the government of
Japan has played an important role both in the Uruguay Round negotiation and ongoing
negotiations thereafter. The government of Japan submitted a high-level offer at the
conclusion of Uruguay Round negotiations without any MFN exemptions, covering about 100
out of 155 sectors in its schedule of specific commitments. It includes important service
sectors such as, among others, business services, telecommunication services, construction
and related engineering services, distribution services, financial services and transport
services.

Regarding the ongoing negotiations after the
conclusion of the Uruguay Round, especially the negotiation on basic telecommunication
services, financial services and maritime transport services, the government of Japan has
contributed significantly to the negotiations by tabling advanced offers. Regarding the
negotiation on basic telecommunication services, the government of Japan made a commitment
eliminating the limitation on foreign investment on a broad range and played an important
role for the successful conclusion of the negotiation. The government of Japan is also
making serious efforts for the successful conclusion of the negotiation on financial
services by submitting a high-level offer reflecting the amendments to the Foreign
Exchange and Foreign Trade Control Law.

In the field of intellectual property rights, since
the conclusion of the Uruguay Round negotiations, Japan has amended the laws and
regulations concerned. Patent Law and Copyright Law have been amended in accordance with
the TRIPS Agreement. This amendment includes extension of patent term or expansion of
neighbouring rights protection to performances etc. relating to WTO member countries.

Since the establishment of the WTO, Japan has
formally raised under the WTO dispute settlement procedures the following four matters
with a view to seeking mutually satisfactory agreements; the unilateral actions by the
United States under Section 301 and 304 of the Trade Act of 1974 (related to the Japan-US
automobile and auto parts issue), the certain automotive investment measures by Brazil,
the certain measures affecting the automobile industry by Indonesia, and the measures
affecting procurement by the regional government of the United States. Japan has also
participated, as a third party, in the disputes between other Members regarding the EC's
trade description on scallops, the EC's banana regime, the export subsidies in respect of
agricultural products by Hungary, the US import prohibition of shrimp, the EC's custom
classification of certain computer equipment, the US measures affecting textiles and
apparel products, the US imposition of AD duties on TV import from Korea, and the
Quantitative restrictions on import products by India.

Relations with Other Countries and Regional
Initiative

Japan as a major trading country maintains close
relations with its major trading partners through bilateral consultations, as well as
through meetings held within the framework of regional initiatives such as APEC, and ASEM.

Japan has been in a mutually beneficial relationship
with other Asian neighbours in economic field. Japan believes that in order to ensure
sustainable growth for developing countries and further liberalization in Asia, it is
essential to strengthen financial and capital markets, as well as to strengthen the base
for further economic growth by modernizing industrial structure and developing
infrastructure. For the recent currency crisis in Thailand, Japan promised a great amount
of expenditure to the relief package which was arranged by some Asian countries and
multilateral development banks, with the IMF playing a central role in coordinating the
package. This is one of the examples which demonstrate Japan's readiness to cooperate with
the Asian neighbours, through various means, to achieve sustainable development in the
region.

APEC

Japan believes that the promotion of cooperative
economic relations with the economies in the Asia Pacific Region through a forum, such as
the Asia Pacific Economic Cooperation (APEC), will foster of an open regional economic
community in the area. Japan believes that this would stimulate world trade, and thereby
contribute to the development of the global economy. The adoption in 1996 of the Manila
Action Plan for APEC, which marked a new "Action Phase" in APEC's activities,
was an important development. Japan's Individual Action Plan (IAP) presents a
comprehensive package of actions to be taken based upon the Osaka Action Agenda of 1995,
which was formulated to implement the Bogor Declaration of 1994. Japan attaches great
importance to the IAP process, and has conducted active consultations with other member
economies, the results of which are reflected in the IAP to the maximum extent possible.
Japan will make continuous efforts to improve its IAP with a view to establishing a
dynamic and on-going IAP process, taking into account the interests of the
private/business sector, which is the main beneficiary of trade and investment
liberalization, as well as other member economies.

ASEM

Several measures have been taken in the field of
trade policy within the framework of the Asia-Europe Meeting (ASEM), since the inaugural
meeting was held in March 1996. The Senior Official's Meeting on Trade and Investment
(SOMTI), and the Meeting of the Directors-General and Commissioners of Customs were both
held twice. The Finance Ministers' Meeting and the Economic Ministers' Meeting were held
in September 1997.

Member countries endorsed the Investment Promotion
Action Plan (IPAP) and the framework for the Trade Facilitation Action Plan (TFAP) at the
Economic Minister's Meeting, bearing in mind that these plans can be adopted at the second
ASEM. The Business Forum and the Business Conference were held from the point of view of
promoting interaction between business sectors.

Japan - US Trade Relations

Trade relations between Japan and the United States
have improved over the past three years as a result of the significant decrease in the
United States' trade deficit with Japan, which was partly a result of the growth of US
exports to Japan, and partly due to the settlement of individual trade disputes in the
areas of automotive and auto parts, semiconductor products and insurance services. Concern
has been voiced by the United States about the recent increase in Japan's trade surplus
with the United States, which has been recorded since last October, due to the steadily
growing US economy and the depreciation of the Yen. It is the view of the Government of
Japan that because of the continuing structural changes in the Japanese economy, such as
the increase in imports of manufactured products and in the proportion of overseas
production by Japanese manufacturers, aside from short-term fluctuations, Japan's trade
balance is unlikely to increase significantly over the medium term.

In view of the importance of the trade balance on a
global basis, the Government of Japan is committed to promoting further structural reform
including deregulation, with a view to achieving economic growth led by domestic demand.

Sector-specific consultations have been held
regarding various issues such as automobile and auto-parts, semiconductors and insurance.
The results of these consultations have been applied on an MFN basis.

Economic Relations with Europe

Japan and the EU conduct regular meetings at various
levels, and exchange views on the respective economic situations and on bilateral trade
and investment issues. Sector-wise consultations have taken place to deal with specific
issues, when necessary. All results of these consultations have been applied on an MFN
basis. Such a cooperative approach based on an intensive dialogue has contributed to
provide some positive trends, such as the improvement in recent years in the Japan-EU
trade imbalance and the resolution of various bilateral trade disputes in a
non-controversial manner. Japan and the EU have also the valuable practice of objective
analysis through the joint study of statistics or other objective data within the
framework of the EU-Japan Experts Meeting on Trade Statistics and the EU-Japan Experts
Dialogue on Distribution.

The EU has concluded Europe Agreements with those
Central and Eastern European countries, which desire accession to the EU in the future,
and it has also extended associate status to some of its Mediterranean partners by
concluding "Euro-Mediterranean Agreements". Japan has expressed to the EU its
interest and concern in this matter, since some of the measures taken by the Central and
Eastern European countries, which provide preferential treatment to the EU, could have an
negative impact on the interest of third countries.

Japan has also expressed to the EU its hope that the
whole process of adjustment to the third stage of Economic and Monetary Union (EMU) be
pursued in a stable manner, taking into account the essential impact, which the
introduction of the single currency "Euro" will have on the world economy.

Regional Integration

Regional trade agreements (RTAs), which have
increased in recent years in terms of both numbers and scope, have a potential to
contribute to the development of the overall global economy. However, in reality there
still remain doubts about their consistency with WTO agreements. Japan is seriously
concerned that some RTAs have raised the barriers to trade with non-member countries, that
they have effectively weakened the free, non-discriminatory, and open multilateral system
formed under the WTO.

Japan believes that, under such conditions, the WTO
should examine strictly the RTAs about their consistency with the WTO agreements. Japan
has, therefore, assumed the initiative and presented proposals to the WTO in order to
improve the organization's capacity to review regional trade agreements, and is actively
contributing to the work of the Committee on Regional Trade Agreements.

Japan has not belonged to any preferential regional
agreements, and offers no preferential tariffs to any country or region, except those
extended to developing countries under the Generalized System of Preferences (GSP).

Domestic Policy Developments Affecting Trade
Policy

Reforms of the Economic Structure

The Government formulated in December 1995 the
Social and Economic Plan for Structural Reforms. Based upon this plan, it has promoted
various measures, bearing two objectives in mind, rectification of the economy's high cost
structure, and development of lines-of-industry for which high future growth is projected.
The Economic Council, which is an advisory body to the Prime Minister, presented in
December 1996 to a Cabinet meeting a progress report on the implementation of the reforms
identified in the Plan.

The Economic Council also started in July 1996
deliberations on how to promote structural reforms, including deregulation measures, in
six areas, namely advanced telecommunications, physical distribution, the financial
system, land and housing, employment and labour and medical care and welfare. These six
areas were selected, because structural reforms in these areas are considered urgent, and
are expected to generate significant economic effects. The Council recommended in December
1996 to the Prime Minister far reaching reforms in these areas, which are compiled in a
report titled "Structural Reform in Six Areas".

Prime Minister Hashimoto announced his decision in
November 1996 to take bold steps and an integrated approach in the implementation of six
major reforms, one of which is also the reform of economic structure. This decision was
made with a view to addressing problems that have emerged as a result of undergoing
changes in Japanese industry and the slow-down of economic growth due to the progressive
aging of Japan's population. In response to the Prime Minister's leadership, the
Government adopted as a Cabinet Decision in December 1996 the Program for Economic
Structure Reform, and in May 1997 the Action Plan for the Economic Structure Reform. The
Action Plan aims at revitalizing the Japanese economy, and it stipulates that the
Government will take comprehensive measures, which are geared at the creation of an
environment that is favourable to new business activities, and that is attractive to
Japanese as well as foreign companies. This is to be achieved in particular by reducing
Japan's high cost structure through the implementation of comprehensive deregulation
measures in such areas as energy supply, and information and telecommunications, and
restraint of the public burden.

The Government revised the Deregulation Action
Program further in March 1997 in line with these decisions. In addition, the Government
decided in July on Policy Actions to Market Access Issues, in order to take the necessary
actions for improving market access, which form part of the reform of the economic
structure.

An estimate by the Economic Planning Agency shows
the aforementioned economic structural reforms will lead to the an annual increase of real
GDP growth rate by 0.9%, and an estimate by the Ministry of International Trade and
Industry shows that GDP in 2001 will have increased by 6.0% through deregulation.

Fiscal Structural Reform

On March 18 1997, the Cabinet decided, as an interim
target under the five principles of fiscal structural reform recently presented by Prime
Minister, to aim to achieve the fiscal consolidation target bringing down the national and
local fiscal-deficit-to-GDP ratio to 3% or less; eliminating the issuance of special
deficit-financing bonds by FY2003. The Cabinet also decided to designate the three
remaining fiscal years of this century as an "intensive reform period" to
promote spending reforms and cutbacks while allowing no sacred areas. On June 3 1997, the
Government's and ruling parties' Conference on Fiscal Structural Reform (chaired by the
Prime Minister) issued the report "the Promotive Measures for Fiscal Structural
Reform", and based on the report, the concrete measures and policies for reform and
reduction of expenditure have been decided by the Cabinet.

In particular, to ensure that general expenditure,
(discretionary expenditures) in the FY

1998 budget is lower than that in the FY1997 budget,
the targets for quantitative reductions in the principal areas of expenditure as concluded
by the Conference on Fiscal Structural Reform will be reflected at the stage of budget
requests for FY1998.

In addition, efforts will be made to further curb
spending depending on the progress in reduction of the fiscal deficit. In accordance with
this decision, the utmost effort will be devoted to the building of a sound fiscal
structure, including the resolute execution of necessary structural reforms. And a bill
for fiscal structural reform was submitted to the Diet in the current extraordinary
session in the fall of 1997.

Competition Policy

The organization and powers of the Fair Trade
Commission were strengthened through the Antimonopoly Act (AMA) Amendment, which went into
force on June 14, 1996. The amendment is expected to ensure an even more vigorous
enforcement by the FTC of the Antimonopoly Act.

Another amendment to the Antimonopoly Act was
promulgated on June 18, 1997.

By this amendment:

1) The existing ban on holding companies will be
repealed at around the end of 1997 to the extent that holding companies do not constitute
excessive concentration of economic power; and,

2) The international contract notification
requirement was repealed at the very day of the promulgation.

The FTC promotes actively competition policy
together with deregulation. Relating to the review of AMA exemption systems, for example,
an omnibus bill was approved by the Diet and it went into force in July 1997 with respect
to the repeal and reform of AMA exemption systems under individual laws (laws other than
the Antimonopoly Act and the Exemption Act). With regard to the review of Government
Regulations, the FTC organized and experts' study groups, in order to propose the
direction of the review from the standpoint of competition policy in each sector. The
study groups have issued various reports, including on telecommunications (1995), domestic
air passenger transportation services (1997), electricity sector(1997) and gas
sector(1997).

The FTC takes rigorous legal actions against
violations of the Antimonopoly Act. The number of legal cases against such violations were
25 cases in 1995, and 30 cases in 1996. The breakdown of these cases is as follows:

1995

1996

Private
Monopolization

0

1

Bid-rigging

14

15

Cartels
(excluding bid-rigging)

5

7

Unfair
Trade Practices

4

2

Others

2

5

Total
Cases

25

30

The total surcharge payment contained in the orders
over the last two years has been estimated at the total of ¥ 9.5 billion (equivalent to
about US $ 79.0 million).

The FTC has been making major efforts to eliminate
bid-rigging. Bid-rigging cases account for more than half of the legal actions. Of these
cases, the FTC filed for criminal accusations with the Public Prosecutor General in the
following two cases : (1) bid-rigging of tenders for electrical facilities' contracts
commissioned by the Japan Sewage Works Agency (1995), and (2) bid-rigging of water meters
ordered by the Tokyo Metropolitan Government (1997). In 1990, the FTC adopts a policy to
actively bring accusations in order to seek criminal penalties against violations that
substantially restrain competition in a particular field of trade, such as price cartels,
supply restricting cartels, market allocation agreements, bid-rigging, and boycotts which:

1) constitute serious violations that are likely to
have a widespread influence on people's lives; or

2) involve firms or industries that are confirmed
offenders, or that do not abide by the measures to eliminate the violation, and where the
administrative measures of the Fair Trade Commission are not considered to fulfill the
aims of the Antimonopoly Act.

In addition, the FTC considers it particularly
important that Antimonopoly Act violations be eliminated in those economic sectors where
government regulations are relaxed, because such violation could nullify the benefits of
deregulation. The FTC has been employing, to this end, various measures authorized under
the AMA.

For example:

1) It was found that the trade association of road
haulage companies decided to increase the transportation fees charged by its members. The
association then let its members notify the increases to the government authority in
charge. In February 1996, the FTC issued a recommendation decision against such activities
for violating the Antimonopoly Act (February 1996, the FTC);

2) The FTC found that a public testing organization
for food for patients in hospitals and a related company collaborated to monopolize the
market. The FTC issued a recommendation decision against such activities in May 1996; and,

3) The FTC also issued warnings against
anti-competitive practices in the fields of taxi and air transport.

In the field of surveys on business activities and
the current economic situation, the FTC, in 1996, published the results of the survey on
activities of Japanese trade associations perceived from the perspective of foreign-owned
enterprises. The results of the survey indicate that the openness, non-discrimination, and
transparency of trade associations' activities have been enhanced. However, certain
government agencies tend to use trade associations to convey information in facilitating
administrative objectives. Among the Antimonopoly Act violations by trade associations
established in individual industries, those committed in connection with governmental
regulations or administrative actions represent a high proportion. Hence, in order to
prevent such violations by trade associations, it is necessary not only for trade
associations themselves but also for administrative authorities to take appropriate steps.
The FTC is going to make efforts to make the Trade Association Guidelines and other
guidelines better known among the general public, and also to make the administrative
authorities concerned fully understand the essence of the Antimonopoly Act.

The FTC also published, in 1997, the surveys on the
actual conditions regarding transactions of photographic film and paper among the relevant
firms.

In the field of technical cooperation, the FTC has
held annual training courses on competition policy for participants from developing
countries and economies in transition. The FTC has likewise held training courses on
competition policy for participants from APEC member countries under APEC's technical and
economic cooperation mechanism of "Partners for Progress".

Financial System Reform

The financial system reform was initiated by Prime
Minister Hashimoto in November 1996. Through extensive and drastic measures, the reform
aims to transform Tokyo into an international financial market the caliber of New York and
London. Among the various areas, the forerunner of the reform is the amendment of the
Foreign Exchange and Foreign Trade Control Law. The amendment passed the Diet in May, and
will come into effect next April. In other areas, reports by the relevant councils were
published in June, and putting together the conclusion of the deliberations by those
councils, the comprehensive reform plan was published on June 13th.

The plan has been formulated on the basis of the
following concepts;

(i) Clarification of the time schedule in order to
promote the reform coherently

(ii) Implementation of all reform measures that are
considered necessary under the following three principles

° Free (i.e., a liberal
market under market principle);

° Fair (i.e., a transparent
and reliable market);

° Global (i.e., an advanced
and international market);

(iii) Creation of measures from the users'
perspective

From the standpoint that the reform must benefit the
users, the plan covers all of the following four perspectives;

(i) Expanding the choices of means for investors and
borrowers;

(ii) Improving the quality of intermediaries'
services, and promoting competition among them;

(iii) Developing a market with further utility;

(iv) Establishing a reliable framework and rules for
fair and transparent transactions.

Financial systems must be reformed so as to ensure
proper return on the ¥1,200 trillion of Japanese household financial assets, smooth
funding for growing industries for the next generation, and active capital flow with the
rest of the world. The comprehensive financial system reform in Japan, which includes bold
deregulation measures and measures to secure transparency and reliability of the market,
is expected to create such a system where the market mechanism functions to its full
extent and optimal allocation of resources is achieved.

Through such efforts to reform, Japan seeks to
enhance the level of functioning of the Japanese financial market to prevent its possible
hollowing out. In doing so, status of the yen as an international currency would be
strengthened.

Current Progress in the Deregulation Process

Since 1993, successive Japanese governments have
attached outstanding importance to the deregulation process. The Cabinet decided in 1995
on the Three-year Deregulation Action Program (FY 1995 to FY 1997) with a view to :

(i) Expanding the range of available choices in
response to diversified consumer needs, and to reducing price differentials then
prevailing between Japan and abroad

(ii) Expanding domestic demand, facilitating
imports, and increasing business opportunities, and thus contributing to harmonization
with the international environment, and

(iii) Reducing administrative work by adopting
simplified standard requirements, including the use of electronic and paperless methods.

The final revision of the Three-year Action Program
was decided for in March 1997. This program shows that 1,635 deregulation measures had
been implemented already as of March 1997. About 1,200 items in total, including 890 new
measures mentioned in this program, in twelve areas are expected to be implemented in FY
1997 and later.

The program was formulated through a transparent
process, taking into account of the following :

(i) comments and proposals from foreign governments
on the occasions of economic consultations;

(ii) written comments and proposals from foreign
governments and private sector organizations in Japan and abroad; and

(iii) the opinions received from such fora as the
Administrative Reform Committee, and the Economic Council.

The basic approach adopted under the program
includes the points listed below :

(i) In principle, economic regulations should ensure
a minimum level of transaction costs. The fundamental principle with regard to regulations
that are of social nature is to retain a minimum regulatory framework consistent with the
need to serve legitimate policy objectives

(ii) The ex-ante type of administration is replaced
by an ex-post facto review system

(iii) A deadline for consideration is specified in
the existing regulation for each of the proposed changes

(iv) The relevant authorities, which do not respond
to requests and opinions on deregulation received from domestic and overseas interested
parties, are requested to clarify their reasons for not responding.

Further deregulation measures are expected in future
to be promoted steadily in a similarly transparent process.

Future Policy Directions

Further Development Of The Reform Process

With the advances in telecommunications technology,
the world is rapidly becoming one global community and dramatic changes are taking place
as we move to a new society in which people, products, capital and information flow
freely. At the same time, Japan faces a myriad of issues, including the rapid aging of
population, the budget crisis and the hollowing out of industry, which, if left
unattended, could well result in Japan's being left behind by the global tide. In other
words, serious limitation have been revealed in the Japanese socio-economic system, which
has sustained the development of the country over the 50 year post-war period. In this new
era in which there has been a dramatic increase in cross-border business and national
systems themselves are becoming a major determinant of industrial competitiveness,
enhancing the economy's overall efficiency and flexibility has been a priority for the
Japanese government. Recognizing the urgent needs of wide-ranging reforms, the Government
of Japan is now promoting extensive reforms as have been described in this report, so as
to create a new Japanese socio-economic system which is more compatible with market
mechanisms and thus suitable for the 21st century.

While taking bold steps in domestic reforms, the
Government of Japan has been keenly aware of the benefits that it has enjoyed under the
multilateral trading system, and the responsibility it has in its maintenance and
strengthening. Japan reconfirms its long-standing commitment to maintain and strengthen a
multilateral free trade system in close cooperation with other Members at WTO and within
other frameworks such as APEC and ASEM, and reiterates its readiness to strive for active
and continued leadership in further liberalization of trade and investment in the next
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